Category Archives: Insurance

Delhi High Court takes up the “No Cashless Facility” Health Insurance Issue

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One might conclude that if one bought a health insurance policy, and paid a higher premium in order to avail of the “cashless facility”, the said “cashless facility” would actually be made available to one. Such a conclusion, however, apparently proved to be erroneous in a number of cases, including one involving a cancer patient.

An Individual Policy Holder who bought an insurance policy from Oriental Insurance Co. Ltd. was told that the “cashless facility” which he had paid for would not be made available to him because he had bought his policy as an Individual (as opposed to having bought his policy through a company). It wasn’t entirely clear why this should have made a difference, given that he had paid a higher premium for the “cashless facility”, and that there appeared to be no reasonable ground for differentiation between a policy-holder who was an Individual Policy Holder and one who was a Corporate Policy Holder.

As a result of this ostensible discrimination, and of not being able to avail of a service for which he had paid, the Individual Policy Holder filed a Writ Petition before the Delhi High Court which came up for hearing on July 30, 2010, before Hon’ble Mr. Justice S. Muralidhar. The Hon’ble Court issued notices to the Insurance Regulatory and Development Authority, The Oriental Insurance Co. Ltd. and Genins India Ltd. (the Third Party Administrator) — the Writ Petition was maintainable as the IRDA falls within the scope of the definition of “State” in Article 12 of the Constitution, as does the insurance company which is a PSU.

When an Insurance Company’s Liability Begins

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The liability of an insurer begins only after the encashment of the cheque and not before ruled a Bench of the Supreme Court comprising Justices S.B. Sinha and Lokeshwar Singh Panta in the case of National Insurance Co. Ltd. v. Yellamma & Anr. on May 5, 2008.

In this case, the owner of a Mini Bus sought an insurance policy in respect of the vehicle. To this end, he issued a third party cheque towards payment of insurance premium. Once the Development Officer of the insurance company realised this, he contacted the vehicle owner and asked him to pay the premium which was apparently not done.

The said insurance cover was issued for the period 3.9.1991 to 2.9.1992. On or about 12.9.1991, the vehicle met with an accident. Yellama who was injured therein filed a claim petition in terms of the provisions contained in Section 166 of the Motor Vehicles Act, 1988 (the Act). An award for a sum of Rs.43,000/- was made.

The High Court increased the amount of compensation to Rs.1,50,000/-. The insurance company then appealed to the Supreme Court which held that a contract of insurance like any other contract is a contract between the insured and the insurer. The amount of premium is required to be paid as a consideration for arriving at a concluded contract. If the insurer insists that a cheque should be issued only by the insured and not by a third party, no exception thereto can be taken. The fact remains that the cheque was not encashed. Concededly, the insured did not make any payment.

Section 64VB of the Insurance Act, 1938 mandates that before a contract of insurance comes into being, the premium should be received by the insurer in advance, stating :

No risk to be assumed unless premium is received in advance:
(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by him or is guaranteed to be paid by such person in such manner and within such time as may be prescribed or unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner.
(2) For the purposes of this section, in the case of risks for which premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.
Explanation: Where the premium is tendered by postal money order or cheque sent by post, the risk may be assumed on the date on which the money order is booked or the cheque is posted, as the case may be.

The question came up for consideration before the Supreme Court in Deddaooa & Ors. v. Branch Manager, National Insurance Co. Ltd. [(2008) 2 SCC 595], wherein upon noticing the precedents which were operating in the field, it was clearly held :

“18. The ratio of the said decision was, however, noticed by this Court in New India Assurance Co. Ltd. v. Rula and Ors. [(2003) 3 SCC 195]. It was held that ordinarily a liability under the contract of insurance would arise only on payment of premium, if such payment was made a condition precedent for taking effect of the insurance policy but such a condition which is intended for the benefit of the insurer can be waived by it.”

The dicta laid down therein clarifies that if on the date of accident the policy subsists, then only the third party would be entitled to avail the benefit therof.

In National Insurance Co. Ltd. v. Seema Malhotra and Ors. [(2001) 3 SCC 151], a Division Bench noticed both the aforementioned decisions and analysed the same in the light of Section 64-VB of the 1938 Act. It was held:

’17. In a contract of insurance when the insured gives a cheque towards payment of premium or part of the premium, such a contract consists of reciprocal promise. The drawer of the cheque promises the insurer that the cheque, on presentation, would yield the amount in cash. It cannot be forgotten that a cheque is a bill of exchange drawn on a specified banker. A bill of exchange is an instrument in writing containing an unconditional order directing a certain person to pay a certain sum of money to a certain person. It involves a promise that such money would be paid.

18. Thus, when the insured fails to pay the premium promised, or when the cheque issued by him towards the premium is returned dishonoured by the bank concerned the insurer need not perform his part of the promise. The corollary is that the insured cannot claim performance from the insurer in such a situation.

19. Under Section 25 of the Contract Act an agreement made without consideration is void. Section 65 of the Contract Act says that when a contract becomes void any person who has received any advantage under such contract is bound to restore it to the person from whom he received it. So, even if the insurer has disbursed the amount covered by the policy to the insured before the cheque was returned dishonoured, the insurer is entitled to get the money back.

20. However, if the insured makes up the premium even after the cheque was dishonoured but before the date of accident it would be a different case as payment of consideration can be treated as paid in the order in which the nature of transaction required it. … A contract is based on reciprocal promise. Reciprocal promises by the parties are condition precedents for a valid contract. A contract furthermore must be for consideration.”

In today’s world payment by cheque is ordinarily accepted as valid tender but the same would be subject to its encashment. A distinction, however, exists between the statutory liability of the insurance company vis-à-vis the third party in terms of Sections 147 and 149 of the Motor Vehicles Act and its liability in other cases but it is clear that if the contract of insurance had been cancelled and all concerned had been intimated thereabout, the insurance company would not be liable to satisfy the claim.

In this case, there cannot be any doubt or dispute whatsoever that no privity of contract came into being between the insurance company and the owner of the vehicle and as such the question of enforcing the purported contract of insurance while taking recourse to Section 147 of the Motor Vehicles Act did not arise.

Being of the opinion that the interest of justice would be subserved by the exercise of its jurisdiction under Article 142 of the Constitution of India, the Supreme Court directed that the awarded amount be paid by the insurance company to Yellama with liberty to it to recover the same from the owner of the vehicle by initiating an appropriate proceeding in this behalf.

(This article is an edited extract of the judgment.)

The Renewal of Insurance Policies

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A bench of the Supreme Court comprising Justices S B Sinha and V S Sirpurkar has ruled that public sector insurance companies, being included in the definition of ‘State’ under Article 12 of the Indian Constitution, cannot refuse medical insurance to persons suffering from pre-existing diseases.

In its judgment of May 16, 2008, in the cases of (1) United India Insurance Company Limited v. Manubhai Dharmasinhbhai Gajera & Ors, (2) New India Assurance Company Limited v. Consumer Education and Research Society & Ors., and (3) United India Insurance Company Limited v. Mukat Lal Duggal & Anr., the Court, among other things, said:

“Whether renewal of a mediclaim policy on payment of the amount of premium would be automatic, is the question involved herein.

The action was brought by private individuals. The writ petition, however, had wider ramification. They not only would affect the writ petitions, but also others who would be similarly situated. Such cases may not be dealt with as individual cases. In appropriate case, such litigation may be regarded as public interest litigation. Even if it not so regarded, the High Court may consider the same to be `Public Law Litigation’

While determining a lis having public law domain, the courts would be entitled to take a broader view. It would not consider it to be case involving contract-qua-contract question only. Even cases involving contracts may be determined by the High Court in exercise of its jurisdiction under Article 226 of the Constitution of India.

In each of these cases, the action on the part of the authorities of the insurance companies was highly arbitrary. Respondents though were not entitled to automatic renewal, but indisputably, they were entitled to be treated fairly.

What was necessary is a pre-existing disease when the cover was inspected for the first time. Only because the insured had started suffering from a disease, the same would not mean that the said disease shall be excluded. If the insured had made some claim in each year, the insurance company should not refuse to renew insurance policies only for that reason.

Renewal of a medi-claim policy subject to just exceptions should ordinarily be made. But the same does not mean that the renewal is automatic. Keeping in view the terms and conditions of the prospectus and the insurance policy, the parties are not required to go into all the formalities. The very fact that the policy contemplates terms for renewal, subject of course to payment of requisite premium, the same cannot be placed at par with a case of first contract.

It is essential that the Regulatory Authority must lay down clear guidelines by way of regulations or otherwise. No doubt, the regulations would be applicable to all the players in the field. The duties and functions of the Regulatory Authority, however, are to see that the service provider must render their services keeping in view the nature thereof. It will be appropriate if the Central Government or the General Insurance Companies also issue requisite circulars.

The appellants in this case being subsidiaries to General Insurance Corporation [and therefore public sector companies] cannot ignore the statutory provisions. They are bound by the directions issued by the Central Government.

We would request the IRDA to consider the matter in depth and undertake a scrutiny of such claims so that in the event it is found that the insurance companies are taking recourse to arbitrary methodologies in the matter of entering into contracts of insurance or renewal thereof, appropriate steps in that behalf may be taken.”

Laws

The basic laws involved in this case were:

The General Insurance Business (Nationalisation) Act, 1972
The Parliament enacted the General Insurance Business (Nationalisation) Act, 1972 to provide for the acquisition and transfer of shares of Insurance Companies and undertakings of other insurers in order to serve better the need of the economy by securing the development of general insurance business in the best interest of the community and to ensure that the operation of the economic system does not result in the concentration of wealth to the common detriment, for the regulation and control of such business and for other matters connected therewith or incidental thereto.

The Insurance Act, 1938
The business activities of the insurance companies are governed by the Insurance Act, 1938. In terms of the provisions of that Act, an authority known as Insurance Regulatory and Development Authority (the Authority) was constituted by the Central Government in exercise of its power conferred upon it by Section 114 (2)(c) of the 1938 Act.

The Insurance Regulatory and Development Authority Act, 1999
The Parliament also enacted the Insurance Regulatory and Development Authority Act, 1999. By the 1999 Act the Parliament inserted Section 24A in the 1972 Act directing cessation of the exclusive privilege of the Corporation and the acquiring companies in relation thereto. In exercise of the powers, the Authority made Regulations known as Insurance Regulatory and Development Authority (Protection of Policyholders’ Interest) Regulations, 2002.

(This post comprises an edited extract of the judgment.)

Never Events

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Never Events have been in the US news for a while now. They are creations of health insurers and, as the name suggests, events which should never have happened had the patient had better medical care. They are also events which insurers will not pay for having treated : the hospitals which are responsible for the Never Event having occurred are expected to pay for its treatment.

The Wall Street Journal reported that following the lead of the Federal Medicare programme, ‘Aetna Inc., WellPoint Inc. and other big insurers were moving to ban payments for care resulting from serious errors, including operating on the wrong limb or giving a patient incompatible blood’.

It isn’t entirely clear how this would work in practice though.

As some doctors have pointed out, it may not actually be possible to prevent Never Events ever happening, and insurers certainly haven’t done anything in the way of creating guidelines on how to prevent them.

As one doctor says, “In 2007, WellPoint was ranked as the 35th largest corporation in America and had revenues of more than $56 billion. In 2007, Aetna was 85th on the Fortune 500 with more than $25 billion in revenues. With such vast amounts of resources, why haven’t WellPoint or Aetna funded a study or created some guidelines for healthcare providsers showing us how to prevent these “never events” 100% of the time?” [2]

What they have in essence done is found a way to cut their own costs while talking about ‘patient safety’.

Links:
[1] http://online.wsj.com/article/SB120035439914089727.html?mod=WSJBlog
[2] http://whitecoatrants.wordpress.com/2008/04/07/more-on-never-events/